IRS Getting Closer to a Virtual Goods Tax

Due to the billions of dollars being transacted in virtual worlds worldwide, the Internal Revenue Service has been taking an increasingly closer look on the taxation of virtual goods. In her 2008 Annual Report to Congress last week, national taxpayer advocate Nina Olson discussed taxpayer issues and issues that the IRS needs to address. For the first time, lack of governance over virtual goods transactions in virtual worlds was actually cited as a major concern.

According to the report, “Economic activities in virtual worlds may present an emerging area of tax noncompliance, in part because the IRS has not provided guidance about whether and how taxpayers should report such activities…. To improve voluntary tax compliance, the National Taxpayer Advocate recommends that the IRS issue guidance addressing how taxpayers should report economic activities in virtual worlds.”

In a nutshell, this means that due to lack of IRS rules regarding virtual goods transactions, there is minimal reporting of earnings relating to these sales. Should a tax go through, it would most likely mean a rise in cost for virtual goods.

However, while this is the first time that such a concept was mentioned in the report, it isn’t the first time the U.S. government has researched the idea. Even recently, during the spring of 2008, executives from existing virtual worlds and MMOs addressed Congress in regards to a number of issues including taxation.

Nevertheless, such a tax would not be unheard of as it is already becoming a worldwide trend. Currently, Sweden is constructing a tax law for the same purposes, and Korea has been taxing transactions in virtual worlds since 2007. Even the United Kingdom is implementing laws that affect commerce and gambling in virtual worlds. As such, the U.S. won’t be the first country to increase tax regulation of virtual worlds transactions, and certainly won’t be the last.

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